Nonprofit Accountability: The Sector's Response to Government Regulation

By Peter Swords

CONFERENCE NOTES
NORMAN A. SUGARMAN MEMORIAL LECTURE
Mandel Center for Nonprofit Organizations
Case Western Reserve University

March 16, 1999

My talk today is about nonprofit accountability: yet another talk about accountability. It's been seven years since the Aramony scandal opened the floodgates of accountability concerns. My sense is that there has been little abatement of interest in the topic. This fact alone strikes me as significant. I shall try to say something new. My focus is that of someone who works in New York so a number of my allusions will be to New York developments. When I refer to nonprofits, I refer to charitable nonprofits, that is, those nonprofits described in section 501(c)(3) of the Internal Revenue Code of 1986, as amended.

Here is my thesis. It runs like a loose logical proof. Its premise asserts that an accountability system is only as good as its enforcement mechanism. I next contend that only a government regulatory system can provide a truly effective enforcement mechanism. This point willbe contested and I will defend it in a moment. For nonprofits there are two comprehensive government regulatory agencies: the Exempt Organizations Division (EO Division) of the Internal Revenue Service and the various state charities offices. I refer to these two agencies as the generic regulatory agencies. Continuing my demonstration, I believe that most will agree that these two government agencies are woefully under-supported and thus are not able to adequately enforce accountability dictates. Here is what Harvey Dale said about state charities offices seven years ago when he was privileged to give the Sugarman lecture:

[G]overnment regulators (and most particularly attorneys general, to whom the law confides the principal role in policing charities) tend to allocate their scarce regulatory resources

to other more politically potent portions of their domains. In most states, the Charity Bureau of the Attorney General is inactive, ineffective, overwhelmed, or some combination of these.

Therefore, as an intermediate deduction, I conclude that these two generic agencies ought to be strengthened. This follows naturally from my premise that an accountability system is only as good as its enforcement mechanism and my sub-premise that only government regulatory agencies can constitute effective enforcement mechanisms. My next point is that the general public, which understands precious little about the nonprofit sector, will have no interest in seeing to it that these agencies are adequately supported.

Getting closer to my conclusion, I believe that it is only those who work in and care about the sector that might constitute a constituency to advocate for a stronger EO Division and state charities system. Related to this last point is a factual assertion. Such a constituency is potentially huge. It includes all those who work for nonprofits and all those who serve on their boards. Added to these are the growing numbers of accountants and lawyers who service nonprofits and academics and researchers who study them.

And now my conclusion: the sector, those who work in and those who care about the sector, ought to vigorously advocate for stronger generic oversight agencies. My logic rests on a couple of widely accepted presuppositions about nonprofit accountability. First, that gaining and keeping the pubic trust is absolutely essential for the future flourishing of the sector. Second, that keeping the sector accountable is essential for maintaining the public trust. Therefore, putting this all together, it is my grand conclusion that it is in the sector's interest, indeed its self-interest, to advocate for stronger government regulatory agencies.

This conclusion hardly enjoys widespread acceptance. I am reminded of a comment by the executive director of one of our major national nonprofits who, after a discussion of ways that nonprofit accountability might be enhanced, observed something to the following effect: "Accountability is a high-minded and noble concept until your receptionist calls to inform you that there is an IRS agent in the lobby asking to come up and see you." This same sharp-minded observer, following a discussion about taking steps to help beef-up the EO Division of the Internal Revenue Service, wondered whether it was in his organization's mission statement to take time to help strengthen the unit. There is today a group of people, mostly lawyers, who represent what are called multi-state filers, who are engaged in a campaign to limit the jurisdiction of state charities offices in their attempts to regulate charitable solicitation. ¹ Their motivation seems to stem in part from a generalized distrust of government and I suppose to this extent they partake of the spirit of the times. Indeed, I believe that there are numbers of others in the sector who, while not as radical as this group, share their anti-statist, anti-government attitudes. It may well be concluded that my quest is quixotic.

There are, of course, reformers in the sector who may come to my side. Starting in the early 1980s a number of groups devoted to advancing the whole nonprofit sector, from social services to the arts, have come to be. I run one such group. They perform a function on the state and local level similar to that of Independent Sector on the national level. There are about 25 such groups now and they stretch from Maine to California. In 1989 they formed an association of these umbrella groups called the National Council of Nonprofit Associations or NCNA. In its origins the founders of NCNA committed themselves and their organizations to representing the public interest as distinguished from the narrower interest of their members. This position was consistent with the need to maintain our 501(c)(3) status by avoiding a trade association characterization and I am happy to report that to an admirable extent these groups have adhered to their mission. But as we have seen there is a tension and calls to help efforts to augment government regulatory agencies may force the issue to an uncomfortable degree.

Before proceeding further, it will be useful to get clear on what we mean by nonprofit accountability. I like to approach this subject in terms of a continuum. At the left end of the continuum I put improper diversions of money and assets into private hands, money and assets that would otherwise have been spent or applied to advance the exempt purposes of the organization from which the funds were improperly diverted. Included here are instances of stealing, quasi-looting, and flat out fraud as when a group sets up an entirely bogus "charity" to solicit funds all of which end up in the organizers' private hands with no charitable purpose at all being served. Also included are improper acts of self-dealing ² or payments of excessive compensation to key employees. I have found it useful to refer to these kinds of abuses as raising issues of negative accountability. At the other end of the continuum are issues about whether an organization is effective in doing what it sets out to do; whether what it sets out to do is worth supporting; or whether it is efficient at what it does. These issues of worthwhileness and effectiveness I refer to as positive accountability.

The proposals I am making today for the most part involve only issues of negative accountability. In a moment I will explain why I think these issues are of primary importance, but before I do that I want to say a little about positive accountability. I believe that when people think about nonprofit accountability what usually comes to mind is what I have been calling positive accountability. The thought goes something like this. Tens of billions of dollars are transferred each year to nonprofits and there is no market or voters to exercise discipline to assure that they are providing something of value to society. Nonprofits are accountable to no one but their boards and few boards make the effort to assure that their groups are being productive. In recognition of this problem many believe that there is a need to create effective measures so we can tell which groups merit support and which groups do not. These issues are terribly important and all the work going on to develop new measures, the experiments with outcome funding and the like, is to be applauded. But this is not my topic today.

My topic involves abuses—what I have referred to as negative accountability concerns. While the public may turn sour if it thinks the sector is not being productive, I believe the damage done to the sector's public repute is much worse when individuals are exposed as improperly enriching themselves at the expense of their organization's charitable goals. Put simply, for purposes of maintaining the public's trust, I believe that negative accountability is more important than positive accountability. Thus, my topic today explores ways that the sector can help the two generic government regulatory agencies—the EO Division and the state charities offices—eradicate these abuses. ³

There is more involved, however, than merely extirpating abuses. I believe that negative accountability issues go to the heart of what we mean by charitable. A charitable purpose is one that promotes no private gain. It is one that also promotes a public purpose but the breadth of what public purpose has come to mean under charitable trust and federal income tax law is enormously broad and nearly all of the cases where the issue of an organization's "charitableness" is raised have involved the question of whether or not there has been improper private gain. Indeed, at the heart of our definition of "charity" lies the nondistribution constraint, namely, the rule that money or assets of a charity must not be improperly transferred into private hands to advance private gain. Virtually all of negative accountability abuses instance violations of the nondistribution constraint. To the extent that our two generic regulatory agencies are enforcing negative accountability dictates, they are enforcing the nondistribution constraint and thus are assuring that charities keep charitable. Thus, most broadly conceived, I am suggesting that the sector has an interest in assuring that its two generic regulatory agencies be strengthened to assure that the charitable sector remains charitable.

In a paper ⁴ presented at the American Assembly/Indiana University Center on Philanthropy conference on "The Future of Philanthropy in a Changing America" last April, Joel Fleishman, reacting to the same concerns that motivate me, is driven to ask whether it is time to create a new federal agency for policing and defending the nonprofit sector. I will return to his proposals shortly. For now, in order to give a more dramatic sense of what I mean by negative accountability abuses, I borrow from Joel's list of what he gracefully calls the "litany of recent miscreancy." He notes: the conviction of Jim and Tammy Bakker; the conviction of William Aramony of the venerable United Way of America; the conviction of John Bennett of the Foundation for New Era Philanthropy; the forced resignation of Bruce Ritter of Covenant House; the forced resignation of Peter Diamondopoulis as president of Adelphi University; the allegations concerning improper dealings among the Trustees of the Bishop Estate; the allegations concerning improper behavior by officers of the Freedom Forum foundation; the allegations concerning the questionable use of not-for-profit organizations by politicians for partisan political purposes; the accumulating evidence of escalating percentages of funds raised in the name of charities retained by for-profit fundraising firms; the common fund investment loss caused allegedly by inadequate Board supervision; the Stanford University indirect cost controversy and...the allegations concerning questionable compensation to officers of Minnesota Public Radio and an affiliated for-profit organization. ⁵

Joel, like myself, recognizes the importance of government regulatory agencies. He observes that "[c]ontrary to some of today's prevailing wisdom, government is not an evil, even a necessary evil." He believes that its efforts are necessary for ordering liberty and that without them our liberties "would be undermined by the license of the few who respect no constraint other than their own self-will." He then paraphrases our friend Harvey Dale's Gresham's Law of Regulation "which predicts that, without governmental monitoring and enforcement of laws proscribing fraud and self dealing, among other objectionable behavior that damages us all, the good guys will observe the rules, the bad guys will flout them with impunity, and, if enough bad guys get away with it, the arena of private action will be vitally undermined." ⁶ Joel also aggressively drives home the point I made a moment ago about the two nonprofit generic government oversight agencies being weak and not being in a position to adequately supervise the sector. Indeed, he concludes that the nonprofit "accountability-enforcing mechanism is in fact broken." ⁷ And it is out of this despair that he suggests that the time has come to establish a new federal entity for the purpose of overseeing the nonprofit sector, an entity which he suggests might be called the U.S. Charities Regulatory Commission. ⁸ I am not going to address the merits of this proposal. I would notice however, that whether one accepts my proposal for strengthening existing government regulatory agencies or Joel's for creating a new one, neither is going to happen unless a constituency is built to advocate for the changes. And I repeat my belief that the only place where this constituency will be found is in the sector itself.

I want now to return to what I have already flagged as a contestable part of my logic, namely, that government regulation is essential for effective nonprofit accountability. It may be argued that as big as the nonprofit sector has grown, perhaps today it takes up as much as 8 percent of GNP, it does not require the kind of government intervention and regulation that, for example, the market economy does. As Robert Dahl has pointed out, the economic actors that move the market are motivated by self-interest and "have little incentive for taking the good of others into account; on the contrary, they have powerful incentives for ignoring the good of others if by doing so they themselves stand to gain." ⁹

In contrast, it might be argued that the need for government regulation in the nonprofit sector is slight since those who work in the nonprofit sector are presumably motivated to seek the good of others. Nonprofits do not take as investments billions of dollars of people's savings and hardly any pollute. Anti-trust concerns are only of the most marginal importance. Much of this is true but alas, as Joel's litany demonstrates, there are those who use the sector to improperly advance their narrow self-interest. While compared to the enormity of the commercial market the sector may seem small, it has grown immensely in the past 30 or so years and a very large number of persons now work in the sector. In almost any group there will be rascals and rogues. As the group gets larger the number of rascals and rogues inevitably increases.

So far all I have done is re-establish that there is a problem. But my burden is to show that the solution to this problem requires better government regulatory agencies. Now there are those who, while admitting that the sector needs a much improved accountability system, will maintain that the solution is not stronger government regulation but rather self-regulation. There has been much good work in this field. For years the National Charities Information Bureau has been evaluating nonprofits, as has the Philanthropic Advisory Service of the Better Business Bureau. More recently, a number of statewide groups have initiated accountability programs that largely rely on self-regulation. Generally these and the older programs promulgate a code of ethics or standards covering such things as whether a group provides its annual report on request, whether its solicitations and informational materials are accurate and truthful, whether its board meets regularly and the like. Nonprofit groups are invited to submit information about themselves so that a judgment can be made by the private accountability group as to whether the group is in compliance with its standards. In many cases on-site visits are made. If a nonprofit is approved many of the accountability programs allow the nonprofit to include in its external publications and solicitation material an indication that it has been certified as complying with the standards of the evaluating group. Because of its scope and thoroughness I believe a program conducted by the Maryland Association of Nonprofits bears special watching. ¹⁰ All of these efforts are very much for the good and the sector is surely benefited by them, but I have little hope that they are effective in reaching the rogues.

I assume that when rogues do wrong their behavior is intentional. People do not just carelessly self-deal to their advantage. The payments of excessive salaries that are obscured by the use of affiliated organizations or are made in ways that seem easy to omit from the Form 990 are not done through inattention. ¹¹ The perpetrators of these malefactions have in some ways gone sour; they have become corrupt. They do what they do knowingly. It is hardly likely that they will be deterred by the presence of a code of ethics. A code of ethics may operate to arrest a trend towards these abuses in its early stages, but once the latter stages of corruption have been reached, the code is not likely to have much effect. For these individuals what is needed is the threat of force and coercion and indeed in some cases the violence of arrest and imprisonment, and these deterrents can only be legitimately provided by the government.

Before moving on to my recommendations I want to say a little more about private, voluntary self-regulatory programs. As I have worked through this paper, their importance in helping enforce nonprofit accountability has grown for me. To begin with, knowing that potential contributors and other members of the public might learn that one's organization may not have received the seal of approval from one of these private agencies may result in an organization taking corrective steps that will arrest the growth of conditions out of which real abuses might emerge. Indeed, many groups, after being helped to understand a code of ethics and the like, may improve their management systems just because it is the right thing to do. To the extent that there is a tendency of nonprofit groups today to be disinterested in accountability concerns, it is fortunate that we at least have these groups raising these important questions. In addition, I am aware of several states where the local state charities office and local private nonprofit accountability groups cooperate in sharing information about what may be miscreant nonprofits in ways that significantly strengthen nonprofit accountability efforts. ¹² So as I have thought about it, I have come to believe that it is also important to support these private accountability groups and help make them more effective. For many this position will be as about as popular as my recommendation to help strengthen the two generic government regulatory agencies. Indeed, some find the uninvited intrusions of private groups, which come with their own reporting requirements, more irritating than those of the government. So most broadly conceived, I guess what I am saying is that all efforts to enhance nonprofit accountability ought to be helped.

What might be done to advance the cooperation I am suggesting? Let me suggest two approaches. My first suggestion urges the sector to take the Form 990 more seriously and to promote its accessibility on the Internet. The Form 990 is the information return that nonprofits file annually with the IRS and which serves as the basic annual report for over 35 states now. Secondly, I believe that those who care about the sector should learn in some depth about the two generic government regulatory agencies both with the aim of developing cooperative relations and also to be in a solid position to answer the call for help when advocacy efforts are launched to strengthen these agencies. My thoughts on the 990 are quite detailed and reflect the work of a small group of dedicated reformers who have been working on these ideas for several years. In contrast my ideas on directly supporting the two generic oversight agencies are mine alone and are not as fully realized.

Effective government oversight mechanisms are essential components of any adequate accountability system.

Today our two generic oversight agencies, as a result of being under-funded, are not as robust as they ought to be.

Therefore, it is in the sector's interest, indeed self-interest, to help strengthen the generic regulatory agencies.

All nonprofit negative accountability questions start with the Form 990. Let me assert, perhaps tendentiously, that the 990 is the bedrock for negative accountability. Most of the worst negative accountability abuses involve the improper transfer of money, assets, or wealth into private hands for private advantage, money, or assets that should have been used to advance a charitable purpose—violations of the nondistribution constraint. The 990 has been designed so that many of these improper transfers must be disclosed. ¹³ These abuses involve the transfer of funds to individuals, and this is the kind of activity that disclosure forms using text-type entries, in this case mostly numbers, are good at collecting information about. One may wonder, as I do, whether text-based disclosure forms are good at eliciting information of a qualitative nature that is useful for making substantive evaluations such as whether a particular group is actually helping people. Perhaps these kinds of judgments can only be made on the basis of site visits and the like. I remain agnostic about whether the 990 is useful for these more affirmative purposes. I am, however, a strong believer that it is highly useful for eliciting information that points to abuses.

I have spent a good deal of time during the past few years studying the 990. Some of the results of my efforts are set out in a paper I delivered in the fall of 1997 at the New York University Conference on Governance of Nonprofit Organizations. ¹⁴ This paper was published in an article in the Tax Lawyer this last summer. ¹⁵ I began with the proposition that in nearly every case where improper transfers of value to individuals are involved, what we might call abusive transfers, the transfers are made to those who have influence over the nonprofit. These ndividuals are nearly always picked upon the 990 as "key employees," "directors," "officers," or highly paid employees. For example, nearly all payments of excessive compensation to those who exercise control over an organization must be listed either at Part V of the 990 proper or at Parts I or II of Schedule A. The same can be said for nearly any improper self-dealing transaction. They must be listed at question 2 of Part III of Schedule A. Indeed, over the years the 990 has been tightened so that if such abusive transfers are made to these individuals they must be reported as such. They, of course, seldom are. Those who are cagey enough to figure out how to bilk their nonprofit organizations are cagey enough to see to it that their malefaction is not disclosed on their nonprofit's 990s. These 990s then contain misrepresentations and falsehoods. So now we have two misdeeds: first, the underlying abusive transfer, for example a self-dealing transaction, and second, the misrepresentation on the 990.

Let me make explicit that I am now proselytizing on behalf of the 990. I am trying to persuade you of the vital importance of the 990 for the nonprofit sector. Many in the sector are hardly aware of the 990. As most of you know it must be filed each year with the IRS and, as noted a moment ago, today over 35 state charity offices use it as their basic annual report. For nonprofits it is the single most important document they must prepare each year. It is similar to all the various forms that registered companies must file with the SEC regularly throughout the year, 10Ks, 10Qs, proxy statements, and on and on. It is our fundamental report. It contains uniform financial statements and information similar to that found in organizations' annual financial reports in addition to significant financial data that is not elicited by the annual report. Furthermore, it contains information about political activities and, of course, information about whether the filer has violated the nondistribution constraint. For many nonprofits complying with their 990 filing requirements is the only contact they have with government agencies.

Like the SEC reports, the 990 is a public report. It must be shown to anyone who visits your office and asks to see a copy. Very soon, for a reasonable cost, organizations will have to give copies of their 990s, in person or by mail, to anyone who asks for them. And then there is the Internet and the World Wide Web. Organizations that post their 990s on the Web will not have to provide hard-copies of their 990s to those who ask for them. My guess is that if all goes well perhaps within five years, but more likely later, nonprofits will be required by the IRS to file their 990s electronically—so-called mandatory filing of the 990. For over a year the SEC has refused to accept hard-copy filing of anything; everything must be electronically filed. Admittedly much work needs to be done before it will be appropriate to require nonprofit groups to electronically file their 990s, but that such will eventually be the rule is inevitable. ¹⁶

Long before groups will be required to file their 990s electronically, they are likely to be up on the Web. With financial support from the National Center for Charitable Statistics at the Urban Institute in Washington, the IRS is now scanning images of all 990s filed for 1997 and years thereafter into electronic files. These files are being put onto CD-ROMs and these CD-ROMs are being sent to the National Center for Charitable Statistics and the Philanthropic Research Institute that plan to put them on the Web by the end of the year.

Thus, the 990, always a public document, is becoming more public, a lot more public. Is this a good thing? Ought it be encouraged or opposed? There is considerable unease about this development. Many are worried about the disclosure of salary information. As most of you know the 990 shows the full compensation of all officers and key employees and, after this group of officers and key employees, the five highest paid employees who make more than $50,000. There is concern that the public will not understand why salaries that might seem high are entirely proper. There is concern that the public disclosure of salary information will cause internal problems within organizations when staff members find out how much some of their colleagues are being paid. Some groups worry about publicizing how much they spend on fundraising.

These apprehensions are entirely understandable, but, I believe, unfounded. Let's begin with the salary question. Nonprofits exist as public entities and enjoy a number of privileges. As such, I would think it obvious that all the reasons why the salaries of those who work for the government should be disclosed would apply to those who work for nonprofits. Furthermore, paying excessive compensation to insiders is one of the principal ways that the nonprofit form is abused so it is arguable that the disclosure of nonprofit salary information is more important than disclosure of government salary information. I have heard much apprehension about the imminent wide public disclosure of nonprofit salary information but no convincing arguments about why it will be wrong to do.

So far as concerns about fundraising expenses, to the extent that high fundraising expenses are legitimate, this chronic problem is likely grounded in the sector's reluctance to launch an aggressive public information campaign designed to explain that it costs money to raise money. If on the other hand fundraising expenses are inappropriately high, it is hard for me to imagine a convincing argument that they should not be disclosed.

In addition to these concerns it has been objected that the 990 is just a tax return ¹⁷ and that it is extremely difficult to read ¹⁸ and easy to misinterpret. That it is a tax return can hardly be gainsaid, but it is a tax return designed in considerable part to collect information about violations of the nondistribution constraint and it is precisely the identification and eradication of these abuses that I am arguing is in the interest of the sector to make sure happens. I believe that those who argue that the 990 is merely a tax return do not understand how useful a tool it has become for addressing negative accountability problems. Frequently, I believe they are thinking of the 990 as being used to make positive evaluations about whether an organization is doing anything worthwhile and doing it well. From this perspective the claim that the 990 is merely a tax return might make some sense, but, as should be clear by now, this is not the perspective I am taking. Indeed, its very virtues as a tax return, aimed in considerable part at violations of the nondistribution constraint, are what make it so important for me. To repeat, my thesis rests on the belief that the eradication of these kinds of abuses is in the sector's deepest interest.

Let me now turn to the complaint that the 990 is extremely difficult to read and easy to misinterpret. Certainly to the uninitiated the 990 is hard to read. Huge numbers of 990s are filed every year incompletely with a large number of obvious errors. This strongly suggests that many in the sector are uninitiated to the world of the 990. (That the quality of 990 reporting is a scandal is a subject I will return to in a moment.) What can we say about an argument that dismisses something because it is difficult to read? Not much. At any rate the real point is that people in the sector ought to become more familiar with the 990; they ought to learn how to read it. How many board members read their organization's 990? Precious few. Perhaps the 990 on first encounter is mildly difficult to read, but it is hardly quantum physics and is well within the reach of anyone who takes a little time. (As an aside on this question, I am happy to report that Victoria Bjorklund, a superb nonprofit lawyer in New York, and I are about to start working on preparing a reader-friendly pamphlet on how to read the 990 that will be put on the Web and widely distributed and which will be precisely designed to initiate the uninitiated.)

Finally, let me address the complaint that the 990 is easy to misinterpret. This touches a problem for which I have considerable sympathy. For example, an organization might show quite high fundraising expenses. There may be a very good reason for what appear to be above-average fundraising expenses, ¹⁹ but those reasons may not be evident from looking at the mere figures on the return. I believe that the instructions to the 990 ought to allow a filer to attach a sheet at its end in which it could add explanations to any of the information included in the 990 proper that the filer believes may raise questions. ²⁰

Now it is time for me to try to connect all this to my proposal that the sector cooperate with government regulatory agencies to strengthen nonprofit accountability. First, I believe that the sector ought to work to improve the quality of 990 reporting and second, I think the sector should advocate for an earlier rather than later implementation of mandatory electronic filing of the 990. Before elaborating on these two suggestions, let me remind you that my principal interest lies in strengthening the system in ways that will eradicate nondistribution constraint abuses. So how will better 990 reporting and mandatory electronic filing of the 990 help achieve that goal? Keep this question in mind as I discuss my proposals. Keep in mind also that even if efforts to persuade people of the importance of strengthening our two generic governmental regulatory agencies were successful, it will be many years, if ever, before these agencies are adequately staffed and there will always be the question of whether the hundreds of thousands of 990s that are filed each year with the IRS and the various state charities offices are ever read.

I have already suggested that large numbers of 990s are filed each year replete with omissions and errors. ²¹ It is widely known that this is the case. Such widespread failure to adequately report presents an ideal condition for a nondistribution constraint malefactor. When faced with a question on the 990 whose answer might prove awkward, our malefactor need only see that the question goes unanswered. The poor quality of his organization's 990 will be like so many other 990s and the fact that the question is unanswered will not attract special attention. On the other hand if there occurred a sea-change in the quality of 990 reporting and it was only the rare 990 that was filed with omissions, a malefactor might think twice before leaving blank questions whose answers might be embarrassing. (This would be particularly so if the malefactor knew that his organization's 990 would be posted on the Web for all the world to see. But this gets ahead of my story.) There are, of course, other reasons why the reporting of 990s ought to be improved, such as providing potential contributors with more accurate information, but to repeat, while these objectives are good ones, they are not what I am aiming at.

Last fall in Washington a group of nonprofit leaders led by Wilson Levis convened to begin what is now called the 990 Nonprofit Accountability Collaborative. One of its goals is to improve the quality of 990 reporting. Among other things, the 990 Nonprofit Accountability Collaborative is urging different localities across America to form such collaboratives and is offering them help in doing so. California has recently started a 990 quality reporting collaborative. New York, Maryland, and the greater Washington area are all in the process of starting such collaboratives. These groups will work with accountants to help them with their preparation of 990s. (Most 990s are initially prepared by accountants.) Workshops will be given by groups like mine to help those nonprofit organizations who prepare their own 990s. Attention will be paid to improving ways of keeping track of receipts and expenditures throughout the year so as to be better prepared to complete the 990. If needed, work will be done to develop better software. More generally, efforts will be made to move everyone in the sector to take the 990 more seriously than they do at the present. Special attention will be focused on the boards of nonprofits. Finally, as people come to take the 990 more seriously and learn how to read it and as it becomes more public, a growing number of informed auditors will develop to help the understaffed government regulatory agencies in identifying abusive behavior. Last fall Eugene Steuerle of the Urban Institute wrote an article in which he explores how the new information technology will decrease the cost and time of obtaining access to the 990s and make it easier to do so. After noting that the IRS has never been given adequate resources for properly monitoring the sector, he notes:

"In truth, in any democratic society it is almost always the public that monitors itself, using the public sector as one instrument, not the source, of power. Since the Forms 990 filed by nonprofits will soon be obtainable quickly and easily by the public, it can now take on much of the monitoring that the IRS could never do." ²²

One can expect that potential malefactors may be moved to alter their behavior as they realize that there exists a cadre of informed 990 readers.

Learning more about the 990 is hardly exciting stuff; most in the sector would rather work on the problems they set up their nonprofits to solve. And when you couple this drawback with the reluctance about the 990 I have already discussed, the need for strong leadership to push against the likely resistance towards efforts to improve 990 reporting may be great. And yet it is so obviously the right way to go. Recall that the 990 is the nonprofit reporting form. It is the basis for nearly all government efforts to enforce the nondistribution constraint prohibition in addition to much else. The government, both the IRS and our several state charities offices, assuredly want us to file our 990s accurately and completely. For this reason alone I believe there is a heavy normative obligation on nonprofit groups to improve their compliance with 990 reporting requirements. Your own Laura Chisolm, in a wonderfully useful paper called "Accountability of Nonprofit Organizations and Those Who Control Them: The Legal Framework," ²³ refers to informational accountability, that is, the imperative for nonprofits to adequately comply with their public disclosure responsibilities. Furthermore, as I have said earlier, quality reporting would eliminate an ideal condition for malefactors to file incomplete 990s. I also noted the positive influence on malefactors that can be expected from the development of an informed cadre of 990 readers. Thus, I believe we have a compelling case for all of us to cooperate with these attempts to improve 990 reporting.

I will end this part by talking a little about mandatory electronic filing. A key distinction here is that between electronic files that are merely images of a hard-copy document and digitized electronic files. What you get with an image is just the visual appearance of the file. You can't search or sort it or take information off it to perform ratio tests and the like. These operations, however, can be performed with digitized files. For example, a program could be developed that would search each 990 filed to make sure no information was omitted. When mandatory filing of 990s becomes law, the 990 files will be digitized files.

Similar to the SEC's EDGAR system, as soon as a 990 is filed electronically it should be posted on a Web page accessible through the Internet for all the world to see. The entire file will be posted: the 990 proper, Schedule A, and all the attachments. Programs are now being developed to facilitate electronic filing. My colleague Cliff Landesman in New York has created a program that allows anyone to bring up onto their screen a file that in appearance is identical to our current hard-copy 990. The filer can then fill in the blanks so-to-speak and when the 990 is complete, with the click of a mouse transmit the file electronically to the IRS. ²⁴ It will be easy to modify software programs for preparing 990s to include electronic filing.

There are several features about the electronic filing of digitized 990 files that will be particularly attractive for advancing negative accountability efforts. First, it will be possible to develop a program that will search a 990 to find such things as lines where information has been omitted, columns that do not add up correctly, or errors in carrying information from one part of the 990 to another or from one year to the next. This will be done by electronic automation and thus will be very cheap. Imagine the person-power it would entail to manually check all filed 990s for these kinds of errors. When a 990 is filed with such errors it could be returned to the filer with the errors noted and a statement to the effect that if a corrected version is timely filed, it will be accepted, otherwise the original file will be accepted as the organization's official file and penalties for filing an incomplete 990 and the like will soon be assessed. All of this will be done automatically—including sending out penalty invoices. This program should be enormously effective in improving the quality of 990 reporting. Filers will send in incomplete 990s at their peril. The condition so favorable to malefactors referred to earlier will be eliminated.

Until electronic filing is made mandatory, if a group refuses to disclose its 990 all that an individual seeking to examine the group's 990 can do is to inform the IRS of such refusal and hope that the IRS's efforts will cause the group to change its mind. Given the resource limitations of the IRS, this route may not always be successful. ²⁵ Mandatory filing will eliminate this problem.

Furthermore, with digitized files programs can be developed to search those parts of the 990 where what I have called abusive transfers might be entered or, more likely, not entered. ²⁶ In the latter case, those who know about the abusive transfers could examine the 990 to see if it has been incorrectly completed. If so this may suggest that the error was intentional. I will not speculate on what action such potential whistle blowers might take. Suffice it to say that this possibility recalls Eugene Steuerle's suggestion of ways in which the public at large can help government agencies in enforcing the nondistriubtion constraint. In addition malefactors will think twice before planning to have their organizations' 990s filled out in such a way as to obscure abusive transfers. They will know that their Form 990 will be accessible for all the world to examine and they will never know whether anyone is looking at their organizations' 990s or who is looking at it.

There will be many other advantages to the electronic filing of digitized 990s. It will be paradise for researchers who will be able to automatically search as many 990s as they want for targeted information. Nonprofit rganizations that are interested in knowing a little bit about sister groups operating in the same fields will be able to search by zip code and function. Those developing comparable salary information to meet the intermediate sanctions' reputable presumption will be greatly aided. These are just some of the things that can be done with digitized files.

It appears, however, that mandatory electronic filing of 990s is on a back burner at the IRS. Decisions about when to implement the program will not be made by the Exempt Organizations Division but rather by the Office of Technology Administration and the 990 is not a high priority for this office. ²⁷ Thus, unless outside pressure is exerted it is probable that mandatory filing of the 990s will probably not occur for as long as 10 years and maybe longer. On the other hand if an advocacy campaign aimed at advancing the time for mandatory filing was launched, it is likely that it would happen sooner rather than later. It is, of course, only the sector itself that would have an interest in initiating such a campaign. And it is exactly at this point that tough questions arise for the nonprofit sector's leadership. As noted there is much reluctance about the 990 being made public and this reluctance is only heightened when it is realized how easy it will be to access 990s. No one will have to write to ask for a copy of an organization's 990 and also include a check for the reasonable costs of supplying the copy. Requesting a 990 by mail takes time and an organization not wishing to cooperate will find it easy enough to delay complying. On the other hand, with mandatory electronic filing a mere click of the mouse will bring up the 990 that one wishes to examine. Many will ask whether making information on the 990 so easy to access by bringing this system about sooner rather than later is really in anyone's interest. Will the leadership groups lead or follow on this one?

I shall now address my suggestion that sector supporters adopt the goal of improving the effectiveness of the two generic government regulatory agencies. This might be done in two general ways. First, by providing direct assistance to these agencies in meeting their goals. The whistle-blower function mentioned a moment ago in talking about the 990 is an example of what I mean. A second way would be to help with advocacy campaigns aimed at providing more support for these agencies. Educating those who work in the sector about the EO Division and their state charities office will be a necessary predicate for any of this happening. Very few have any clear idea of what these offices do or why they are important to the sector. Of course, my point that accountability requires effective government enforcement agencies would have to be accepted before there was even the motivation to learn about these offices. But assuming that people can be persuaded that an effective enforcement mechanism is essential for accountability, there remains the further step of explaining how these two agencies actually enforce accountability. Members of this audience are surely among the most informed about these matters and yet my bet is that few of you could detail the differences in the jurisdiction between the EO Division and state charities offices. How many know how these offices learn about abuses? How many have any idea of what should be done to improve these offices' ability to detect abuses? Assuming that abuses are detected, how many here know whether these offices have adequate tools to police them? Or what adequate tools would look like?

There are a handful of lawyers and accountants who know about the importance of the EO Division and how it operates. For example, two of my Sugarman successors, Harvey Dale and Jim McGovern know a great deal about the subject and have very definite ideas about what ought to be done to strengthen this unit. But while this group is a mighty handful, it is only a handful and the rank and file soldiers of the sector know very little indeed. There is further a communication problem. Those who have worked for Treasury or the IRS and know about the importance of precedential rulings, good regulations and the like need to abandon the high poetry of IRS code sections and procedures and speak in prose accessible by the ordinary nonprofit native so that we can all come to understand the importance of these matters.

At least there are some in the sector that understand about the IRS's EO Division. Other than lawyers who work in the state charities offices, my belief is that only Marion Fremont-Smith, who wrote a magnificent book on the subject over thirty years ago, ²⁸ knows anything in depth about these state offices. Several years ago Jim Fishman and Steve Schwartz blessed those of us who teach about nonprofit institutions at law schools with a casebook. ²⁹ This magnificent book contains just four pages out of 1,084 on state charities offices. And yet the de jure jurisdiction that state charities offices have over the sector is far wider than the de jure jurisdiction possessed by IRS's EO Division. In fact the de facto jurisdiction exercised by these state offices is quite slight due almost wholly to the low level of support they receive. And this, of course, is just the problem I have been talking about all afternoon and explains in large part why so little attention is paid to them in case books and elsewhere. Thus, it is understandable that little is known about these offices. It is understandable and unfortunate.

I believe if those who are connected to charitable nonprofits gained a more complete understanding of the importance and function of these offices it would lead to an increased awareness about the nature of accountability problems within the sector and of the things individuals who care about the sector can do to help eradicate accountability abuses. The latter would include working with their state charities offices in addressing these problems. Furthermore, increased awareness would result in a better understanding of the fact that state charities offices are an important source of information for the public about nonprofit organizations.

It should perhaps be mentioned that my suggestion, which calls for representatives from nonprofits to work with state charities offices to strengthen the regulatory system and to make these offices stronger, is premised on the assumption that there is no inherent conflict between the regulators and the regulated, an "us" against "them" standoff. Rather, the "us" is understood as a combination of the government regulators and the myriad of those who work for nonprofits that do not abuse their public trust and the "them" is the very small number that do. Examples of effective and close cooperation exist today in Massachusetts, New York, and Minnesota and very likely in other places as well. Perhaps collaborations can be developed between nonprofit state associations and state charities offices designed to help the nonprofit sector understand the function and importance of their state regulatory system and to sensitize state charities offices to the needs of nonprofits. Ways might be suggested for bringing together the leadership of state charities offices and nonprofit state associations to form task forces to conduct such collaborations. Material could be prepared that would help the collaborations in conducting educational and other outreach programs. ³⁰ There follows a description of some of the efforts that might be undertaken.

To begin with a careful survey might be done of the status of existing state charities offices and their resources. States vary to a considerable degree as to the nature of their charities offices. Some have divisions within the attorney general's office, some within the office of the secretary of state, some with the consumer affairs bureau and some in state offices that would never be expected to house such a function (e.g., the agriculture department). Complicating matters, some states divide the function among two or more offices. Not only do states vary as to where their charities offices are situated, but they also vary widely as to how many persons they assign to the work of the charities offices. New York has the largest office with a staff of 50 and at the other end are states that have no one assigned to such work. Both the National Association of Attorneys General and National Association of State Charities Officials have developed information about these offices but it is not complete. The survey would determine: where each office is placed; how many people work in each office and their particular training (e.g., lawyers, accountants, actuaries, clerks, etc.); the function and jurisdiction of each office (e.g., overseeing charitable solicitation, supervising governance adequacy, etc.) including an analysis of the statutory authority for each office; what each office actually accomplishes in meeting its supervisory objectives (e.g., how many disclosure returns are read and how often are they used for dealing with accountability problems, etc.); the number of reports requested by and distributed to the public; and the legislative committees which have jurisdiction over the activities of such offices, including ascertaining what interest these committees have in such offices. ³¹

As I near the end, let me apply the acid of realism to my proposals. Government regulatory systems are made up by and run by people who are just like all of us here. There is good and bad news in this blunt fact. The good news is that a huge proportion of those who work for these agencies are good, well-meaning people who are genuinely interested in helping make the sector healthy and effective. This is sometimes important to remember especially when confronted with moments of paranoia or even the tendency to demonize those who work for the government. These attitudes are totally unwarranted and are certainly destructive to the course I am proposing.

On the other hand, and here is the bad news, the fact that demons do not populate our two generic oversight agencies does not mean that no mistakes are made or that dysfunctional requirements do not accrete to the regulatory systems. And then there is the role of politics. Let me begin with the last point. I believe in most states the attorney general is elected. There have been instances where an attorney general's electoral ambitions have constrained his or her charities bureau, where perhaps the decision to bring or not bring an enforcement action has been influenced by the ballot box. Sometimes an attorney general will unaccountably rein in his charities bureau chief. I can think of one recent example where the charities bureau chief in question is one of the giants of the field and as a consequence of his being told to limit his outside activities, the broader sector has lost, temporarily I hope, this wise man's participation in helping us try to make things better.

The influence of politics on government regulatory systems brings me back to an earlier point I made, namely, the nearly total ignorance by most of those who work in the sector of the roles and functions of these offices. Today political interference with charities bureaus takes place in a virtual vacuum because no one in the outer world knows or cares about it. If, however, we developed an ever-growing constituency within the sector of those who were in a position to know about these occasional problems and who understood the harm they cause, I believe their incidence would be greatly minimized. After all this is the same constituency who I have suggested will be working within the political system to strengthen the system. It is simple human nature to be more responsive to the criticisms of those who for the most part are trying to help you rather than being out to get you.

In addition to the problem of politics, inevitably over the years as these regulatory systems have developed, rules and requirements have been imposed that might be called dysfunctional. I think of the dissolution provisions of New York's Not-For-Profit Corporations Law. There are a numerous other examples. In addition, in view of the large number of states and local jurisdictions that exercise oversight over the sector, there is the seemingly inevitable phenomena of multiple regulation of the same thing producing greater and greater amounts of duplicative paper work and compliance requirements. There is room for much trimming and increasing uniformity in reporting requirements and the like. Again it is not likely that the reforms needed to clear up these problems will occur unless a fairly large constituency of informed sector participants develops, a constituency which is in a position to understand the need for reform and to bring whatever pressure is needed to produce the desired changes. It is important that there be developed amongst the sector's leadership a greater understanding and appreciation of our regulatory systems and the leadership needs to help those who run the sector also develop such an understanding.

Let me offer one example of a problem in New York that suggests the need for an informed leadership group able to thoughtfully respond to a difficult problem. Today a troubling negative accountability issue involves nonprofit salaries that are perceived to be too high. Recently I visited New York City's comptroller's office with a couple of my board members to discuss a proposal they had made to impose a user fee on nonprofits to help finance some of the city's infrastructure needs. After a while it became clear that concerns about excessive nonprofit compensation packages were at the bottom of what was bothering them. One member of the comptroller's group half jestingly told of a proposal to subject nonprofits to a tax equal to the excess over $245,000 of any salary paid to their staff. $245,000 is the amount that Rudy Crew, the Chancellor of the Board of Education, receives. He is the highest paid official in the city today. A couple of days later I received a survey sent by the Inspector General of New York's Office of Welfare to about 150 nonprofit social service groups in New York eliciting a lot of rather pointed salary information. Once more we made a visit and once more we heard about concerns with too high salaries. This time mention was made of salary caps.

What might be called populist attacks on the putative high salaries of some of those who work in the sector are obviously dangerous. They could open up a Pandora's box of intra-sector divisiveness that would cause it great harm. It seems to me that there is a need for just the kind of informed leadership group I was talking about a moment ago to assure that those in the government develop an enlightened understanding about the realities of nonprofit salaries in today's circumstances.

It is time to bring my talk to an end. I begin by recalling what Harvey Dale said when he gave the Sugarman Lecture:

Let me now summarize what I have been saying. My principal theme has been that the sector owes it to itself to step up efforts to root out negative accountability abuses, for if we fail to do so we will lose the public's trust. A sub-theme has been that an effective government enforcement system is essential for enforcing accountability prescriptions and that it is in the sector's interest to help strengthen the government regulatory agencies that have oversight over the sector. And part of this idea is that the sector should become much more knowledgeable about the nature and functions of these agencies.

A second theme has emphasized the importance of disclosure and the centerpiece of this theme has been the Form 990. I have argued that much more care should be taken in filling out the 990 than is evidently the case today and that our community should become much more familiar with the 990, more familiar with what it aims to accomplish and with what can be learned from a careful reading of it, and this especially applies to nonprofit board members. I suggested that a more exacting approach to completing the 990 by our sector would remove an optimal condition for potential negative accountability abusers to omit completing those parts of the 990 that might prove awkward for them since under such conditions it was unlikely that their omissions would be noticed. Connected to this point I noted that the mandatory filing of digitized 990s that would be posted on the Web for the entire world to see would also help deter sloppy reporting on the 990 and the ability to hide behind such practices. I urged that the sector should advocate that mandatory filing be brought about sooner rather than the later.

While these recommendations have been fairly concrete and practical, many may find them troubling and this suggests to me the need for deeper and more discerning discussion amongst our community about the importance of complying with the basic maxims of accountability

that apply to our sector and particularly with those imposed by the government and even more particularly with those involving disclosure requirements. I hope my remarks may make a small contribution to this discussion.

2 A board member selling a building he owns to a nonprofit on whose board he sits at a price far in excess of its fair market value would be an example.

3. Furthermore, I do not believe anyone thinks these agencies should be in the business of deciding whether groups are doing anything worthwhile or doing it well. On the other hand, those groups that receive government contracts and grants are usually monitored by the agencies that let the contracts and this oversight does get at what I have been calling positive accountability.

4. Fleishman, "Public Trust in Not-for-Profit Organizations and the Need for Regulatory Reform," in Philanthropy and the Nonprofit Sector in a Changing America, p. 172 (C. Clotfelter & T. Ehrlich eds. 1999).

8. Fleishman in fact offers three proposals, or strategies, for fixing the nonprofit accountability-enforcing mechanism, the last of which is the new federal regulatory commission. Briefly, he first envisages nonprofit umbrella organizations creating a non-governmental accountability-enforcing organization, which would investigate rumors of fraud or malfeasance. If abuses were found that merited government intervention, the organization would urge the appropriate governmental authorities to take action. The organization would also take the initiative in establishing ethical standards that go beyond the requirements of law. A second strategy would involve foundations making funds available to the National Association of State Charities Officials to create a national clearinghouse on information of abuses by nonprofits. This new organization would investigate such abuses and work with the appropriate state and federal authorities to activate legal proceedings when necessary. One senses that Fleishman does not believe that either of his first two proposals are likely to be implemented and thus is driven as a "last resort" to his proposal for a new federal agency to police the sector.

10. The Maryland Association of Nonprofits (Maryland Nonprofits), led by Peter Berns, began its program about three years ago. A team of 50 representatives from various parts of Maryland's nonprofit sector worked for two years in drafting a nonprofit code of ethics for Maryland nonprofits called "Standards for Excellence: An Ethics and Accountability Code in the Nonprofit Sector" (Standards). The Standards were released in May of 1998 and are regarded as a particularly comprehensive and well thought out code of ethics for nonprofits. Maryland Nonprofits has developed resource packets and has been conducting workshops throughout the state both aimed at providing help to nonprofits in implementing the standards. In addition, Maryland Nonprofits offers a voluntary certification program. To participate an organization must submit a written application, provide documentation and pay a small application fee. After applying for certification, a nonprofit is evaluated by a three-member volunteer panel of trained peer reviewers. Once an organization is successful, it is licensed to use the Maryland Nonprofits Standards of Excellence seal for a three-year period. To date over 100 Maryland nonprofit organizations have applied for certification.

Another very effective self-regulatory effort is that conducted by the Evangelical Council for Financial Accountability or ECFA. ECFA was founded in 1979 in response to the scandals that had beset some parts of the Evangelical community. Generally, any 501(c)(3) Christian nonprofit organization may become a member of ECFA by agreeing to comply with its Seven Standards of Responsible Stewardship. The standards are pitched nicely at questions of financial responsibility. They include that every member organization appoints an audit review committee, obtains an audited financial statement, provides a copy of its current audited financial statement upon written request, avoids conflicts of interest, and, of considerable interest, complies with a number of maxims covering fundraising (including communicating truthfully, honoring promises made in fundraising appeals, providing reports on request and fully disclosing arrangements with outside fundraisers where compensation is based on percentage of what is raised). Each member pays an application fee of $200 and an annual membership fee that is based on the amount an organization receives each year in cash donated income. The fees range from $290 (for smaller organizations) to $6,800 (for the largest organization). Through a review system explained below, members become accredited by ECFA. ECFA makes known to the public on request whether an organization is certified. Today over 900 (that collectively receive over $5.5 billion a year) organizations are members of ECFA. ECFA evaluates all its members annually through a procedure it calls the "Annual Membership Review." Members are required to submit documentation that supports their continued compliance with the Standards. The documentation includes: recent audited financial statements; a list of current board members and audit review committee members; sample of fundraising appeals; annual report; salaries and remuneration of top five paid employees; and a completed questionnaire, signed by the member's Chief Executive Officer, Chief Financial Officer and Chairman of the Board. Since 1989, ECFA annually performs 30-40 random field reviews of selected members. When complaints about members are received, a compliance review is conducted. The compliance review is intended to investigate allegations of non-compliance with ECFA's standards. Depending on the seriousness of the complaint, the compliance review may also involve an on-site evaluation of the member. These reviews may result in de-certification.

11. It may be that a pattern of abuse begins through inattention. One uses the office's phone to make personal calls and then as time goes on it becomes easier to take larger advantages of one's organization until the perpetrator of these deeds has become inescapably corrupt. It is clear, however, that when this person has advanced to this stage of corruption, what he or she does he or she does intentionally.

12. Note, however, that for the cooperation between state charities offices and local private accountability groups to be fruitful, the state charities offices must be at a sufficient level of strength to be able to take effective action when necessary. Few are today. The cooperation between the Securities and Exchange Commission (SEC) and what in that world are called Self-Regulatory Organizations (SROs), such as the New York Stock Exchange, have been singularly successful, but then the SEC is a very well supported government regulatory agency.

13. Henry Hansmann coined the term "nondistribution constraint." He suggested that this constraint went to the heart of what we mean by a nonprofit organization. Here is how he defined the term: "A nonprofit organization is, in essence, an organization that is barred from distributing its net earnings, if any, to individuals who exercise control over it, such as members, officers, directors or trustees." Hansmann, The Role of Nonprofit Enterprise, 89 Yale L. J. 837, 840 (1980). As so defined, the nondistribution constraint is virtually identical to the no private inurement prohibition of section 501(c)(3). However, violations of the inurement prohibition are not the only kinds of transfers of worth to private interests that will put an organization's exemption in jeopardy. The Internal Revenue Service and the courts have developed a related concept that might be called the prohibition against benefiting private interests more than incidentally. I shall refer to this doctrine as the no private benefit rule. See, GCM 39862 (December 2, 1991), American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989), United Cancer Council Inc. v. Commissioner of Internal Revenue, Nos. 98-2181 & 98- 2190 (7th Cir., February 10, 1999). While the prohibition against private inurement will be violated if any payment, however small, is made to an insider, to violate the no private benefit rule the transfer of worth must be fairly substantial and it can be made to any private interests, not just to insiders.

Thus, transfers that violate the no private benefit rule can be made to persons, for example, other than officers or key employees. These payments will not have to be listed on those lines in the 990 designed to pick up transfers of value to those who exercise control or substantial influence over the organization (e.g., key employees). Consequently, these kinds of violations of the nondistribution constraint will not be as easily picked up in examining the 990 as abusive transfers to insiders would be. In many cases these transfers will be included only in lines showing aggregate payments. In some cases knowledge about an organization's whole operation will be needed before a violation of the no private benefit rule can be identified.

Thus, it may be fairly concluded that while the 990 is very good at pointing at violations of the no inurement prohibition, it is not as well targeted at violations of the no private benefit rule. (Even with respect to abusive transfers to insiders, there may be cases of such payments being made by using affiliated organizations where the payments need not be reported on a 990 line designed to pick up payments to specified individuals, such as Part V of the 990 where compensation payments to key employees must be disclosed. Furthermore, recently it has appeared that abuses may be occurring in circumstances where a nonprofit is a membership corporation with one person as the sole member. In these circumstances such a person has total control over the corporation. Transfers of worth to this person or his family will not have to be listed on a 990 line for specified individuals.)

14. "New York University Conference on Governance of Nonprofit Organizations: Standards and Enforcement." The conference was conducted by the National Center of Philanthropy and Law on October 30-31, 1997.

15. Swords, The Form 990 as an Accountability Tool for 501(c)(3) Nonprofits, 51 Tax Lawyer 571(1998).

16. It may be that the mandatory system will be implemented on a staggered basis with large organizations with resources being required to electronically file earlier and smaller nonprofits later in time.

17. In fact it is more than a tax return. During the late 1970s and early 1980s, a small group of state officials teamed up with IRS and nonprofit leaders to make changes to the Form 990 and its instructions aimed at having the 990 become a uniform public disclosure information report consistent with accounting standards applicable to the nonprofit sector (see below). Many states have public disclosure laws that require making annual public reports that are designed to give potential contributors and others financial and other information about nonprofits. Over the years states had developed differing reporting forms and for nonprofits, soliciting contributions or doing business in various states, the annual reporting burden became very heavy. In both 1979 and 1981 changes were made to the Form 990 with the hope that states would adopt the Form 990 as the basic report to be used by nonprofits in satisfying their public disclosure law requirements and thus move towards uniformity among state requirements and a reduction in burden of annual reporting. As noted in the text over 35 states have done so. The accounting standards used were the "Standards of Accounting and Financial Reporting for Voluntary Health and Welfare Organizations" (this document, referred to by many as the Black Book, is co-sponsored by the National Health Council, the United Way of America and the National Assembly of Voluntary Health and Social Welfare Organizations) and generally accepted accounting principles (GAAP). All Black Book revisions have been reviewed by the American Institute of Certified Public Accountants (AICPA) and are thus considered compatible with GAAP.

18. The same thing, of course, can be said about GAAP financial statements. Neither the 990 nor GAAP reports are designed for user-friendly general public readability.

19. For example, such expenses tend to be high when a new fundraising program is being commenced or the cause for which funds are being solicited may not be a popular one.

20. Or perhaps the filer ought to be able to add attachments to any particular line on the 990 explaining what might appear to be a questionable response.

21. For example, studies in the past by the General Accounting Office and the State of Connecticut indicate that more than half of all 990s are incomplete and have arithmetic errors.

23. Chisolm, "Accountability of Nonprofit Organizations and Those Who Control Them: The Legal Framework," 6 Nonprofit Management & Leadership, 141, 144 (1995).

24. This assumes, of course, that the IRS will have established its system for accepting electronically filed 990s.

25. Recently a federal appellate court, in ruling that the disclosure rules do not confer a private cause of action upon individuals to compel disclosure of the 990s, confirmed what most supposed to be the case. Schuloff v. Queens College Foundation Inc., No. 98-7466 (2nd Cir. 1999).

26. A search of image files might also reveal such abusive transfers, but it will not be as easy as working with digitized files for which programs can be specifically designed to pickup such problems.

27. Several state charity offices are moving forward with electronic filing. Cliff Landesman is developing an electronic reporting site that will be used by participating states. The Web site will be ready by October 1999, and New Hampshire has indicated that it will be ready to accept electronic filing of 990s at that time. It is likely that New Mexico will join the system and Oregon and California have expressed an interest in doing so. Note, this state system will not be mandatory at the start.

29. J. Fishman & S. Schwarz, Nonprofit Organizations: Cases and Material (1995). The casebook does contain the reports of cases that in passing discuss the jurisdiction and nature of state charities offices, but other than the few pages on these offices per se, there is little systematic attention given to them.

30. A year after he gave his Sugarman lecture, Harvey Dale, in a talk to the annual meeting of the National Association of Attorneys General and National Association of State Charities Officials, suggested that the attorneys general use their offices to act as conveners for the charitable sector to bring its leaders together to discuss accountability and regulation.

31. My colleague Harriet Bograd has done some important work on this topic. See, Bograd, "The Role of State Attorneys General in Relation to Troubled Nonprofits," Working Paper No. 20, Yale University Program on Non-Profit Organizations (1994). More is needed. Marion Fremont-Smith, now working as a Senior Research Fellow at the Hauser Center for Nonprofit Organizations at Harvard, is doing a study designed to survey and report on the extent and nature of non-compliance with state and federal laws regulating the behavior of charities and to determine the adequacy of compliance assistance and training offered to nonprofits all with the view of suggesting remedial actions for both the public and private sectors. This will help.

Nonprofit Accountability:The Sector's Response toGovernment Regulation

Nonprofit Accountability:
The Sector's Response to
Government Regulation